What the Eurozone crisis means for contractor mortgages
The current uncertainty in the Eurozone is having an adverse effect close to home, with the UK stock market plummeting and then soaring upwards again. Such volatility’s been day-to-day, mostly thanks to sentiment swinging widely between financial Armageddon and euphoria on the back of the slightest sign of a break through, or not, to the crisis. Unfortunately, that knock-on uncertainty is now having a visible impact on UK mortgages, writes Tony Harris, founder of ContractorMoney, the specialist Independent Financial Advisers for Contractors.
Change afoot in the mortgage market
There have been stirrings in the mortgage market over recent weeks which suggest the low interest rates that new and existing borrowers have enjoyed for the last three years may be about to come to an end.
Many lenders are pushing up their standard variable rates despite the fact that the Bank of England base rate hasn’t risen from its current, 300-year, low point. This is all a result of increasing nervousness amongst lenders regarding inter-bank transactions, as the troubles in the Euro-zone again raise questions over the balance sheets of financial institutions. With little appetite to lend, some mortgage companies seem intent on pricing themselves out of the market for new clients sadly, whilst these same institutions also increase monthly repayments for existing borrowers.
Is it worth considering a fix?
While there are still relatively competitive rates available from a handful of lenders, recent moves in the mortgage market have understandably made contractors nervous. Indeed, research by the Halifax suggests a further £25 billion of mortgage debt will come off of initial fixed and discounted rates next year. This enormous sum will also be falling onto the lender's standard variable rate (SVR).
As has been seen over the last few weeks, SVR places a borrower completely at the mercy of the lenders commercial requirements, at any given time, rather than keep you in control of events. That means now may be the time to consider a fixed rate scheme. Opting for a five-year fixed rate now may mean that you pay more than your colleagues on a tracker in the short term, but you can rest assured that whatever happens to rates over that period, your repayments will remain the same. This is especially useful for contractors on a tight monthly budget, allowing you to plan for up to the next five years. As an added bonus, it is entirely possible that over this period your contract rate will increase, so the repayments may become even more affordable over time.
Time to remortgage?
If you are currently on your lender's standard variable rate (SVR) then now is a sensible time to look at remortgaging to either a tracker or a fixed rate mortgage, because lenders are able to move their SVR with only a month’s warning. One month doesn’t give you very much time to source a new mortgage and there is nothing stopping the provider from raising the SVR again at any time they see fit.
If you are unhappy at the idea of fixing, you could consider opting for a tracker rate instead of remaining on the SVR because at least this way you will know that the repayments will only increase if the Bank of England’s base rate increases. As it is widely predicted that the base rate won’t rise until 2013, you could potentially enjoy low repayments for a considerable time - whereas there is no such guarantee with your lenders SVR (as they can choose to increase this at any time and for any reason).
The mortgage underwriting which enables a specialist adviser to arrange your mortgage based on a multiple of your annualised contract rate alone is as yet unaffected by the Eurozone turmoil. However, as lenders grow more wary of risk in a bid to strengthen themselves against the impact of events in the Eurozone, we may start to see more reluctance to lend to contractors, sadly.
Unfortunately though, it’s not just headwinds overhead for contractor mortgages. Cue my follow-up piece for CUK next week on how the Eurozone crisis is threatening to bite pensions and investments and, crucially, read how contractors can protect themselves from the fallout.